Savage Slide in Vessel Values Due to Low Oil Price

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Oil prices

The first week of September 2016 got under way with the oil price making significant gains. However, these gains are only enough to drive the price back towards US$50.  This is hardly the sort of change that is going to make owners of offshore support vessels sleep any easier.

Brent increased by more than 5 percent, to US$49 per barrel, largely as a result of rumours that Saudi Arabia and Russia have agreed to co-operate on the fringes of the G20 meeting. However, this rumor remains to be confirmed.

As Commerzbank Research noted recently, there is increasing pressure on oil producers to agree at least on production caps, as production is constantly being further expanded at the moment.

Oil production data from OPEC

According to a Bloomberg survey, OPEC oil production in August grew by 120,000 barrels per day to a record 33.69 million barrels per day.  Saudi Arabia scaled up its output to a record 10.69 million barrels per day, while Iraq was producing 4.48 million barrels per day, which is close to a record level.  Iran increased production to 3.62 million barrels per day – its highest level in over five years.  Iran itself even claims to be producing 3.8 million barrels per day at present, and could step up its output to 4 million barrels per day in 2-3 months.

Production exceeds demand

OPEC is producing more crude oil than the market needs.  Taking the IEA’s estimates as the yardstick, the call on OPEC in the second half of 2016 amounts to 33.3 million barrels per day.  Even if OPEC oil production were to be capped at its present level, the oil market would only cease to be oversupplied in the second half of 2017. 

Commerabank, about the recent price spike, said that they see no fundamental justification for higher oil prices.  At the same time, the onshore rig count is beginning to creep up and shale oil producers are learning how to get greater ‘bang for their buck’ out of drilling and completion operations, leading to significantly increased oil production per well.

Restructuring status

It is against the above backdrop that OSV owners and owners and operators of other vessel types are attempting to restructure.  Some have done so but others are still going through that process, knowing that, whatever happens to the oil prices, the market is still massively over-supplied.  The latest company to be able to breathe a sigh of relief and confirm that it has reached a restructuring deal is Prosafe, the well known owner and operator of offshore accommodation units, which says that all of the lenders in its bank facilities have confirmed their approval in favour of the refinancing the company.

Some brave companies have claimed that we may have reached the bottom of the market. As recently reported by OSJ, Bourbon says it believes the bottom of the market in the subsea segment was reached in the first quarter of 2016.  It also suggested that the bottom of the market in the deep and shallow water OSV sectors would be realised this quarter.  As broker Seabrokers noted recently, it is promising to hear one of the largest OSV owners calling the bottom of the market, but this is a perspective that other owners, such as Hornbeck Offshore, would flatly reject.  Hornbeck, which is a sobering thought for vessel owners, said that anyone calling the bottom of the OSV market is likely to be very much mistaken.

Global scenario

In the meantime, an analysis of the value of offshore vessel fleets in different parts of the world suggests values have plummeted since the crisis in the industry precipitated by the steep fall in the oil price.  VesselsValue has undertaken a unique survey of the market value of OSV fleets in five major offshore regions by comparing automatic identification system (AIS) data and VesselsValue OSV market values.  The AIS data allows analysis of the number of vessels in the different regions over time.  The survey revealed that in five major offshore regions – the North Sea, Gulf of Mexico, Persian Gulf, Gulf of Guinea and the South China Sea – the OSV fleet suffered a combined 59.5 per cent fall in value between June 2014 and July 2016.

Miles Cole, head of offshore at VesselsValue, said that this analysis illustrates the monumental effect that the falling price of oil has had on the OSV market over the last two years.  In the North Sea, between January 2014 and July 2016, the total value of tonnage has fallen by 55 per cent from US$10.3 billion to US$4.4 billion, and there has been a 6 percent decline in the number of vessels in the region.  In the Gulf of Mexico, the total value of tonnage has fallen by 65 per cent from US$8.9 billion to US$3.0 billion, between January 2014 and July 2016, with a 29 percent decline in the number of vessels in the area.

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Source: Offshore Support Journal

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